The Thin Wet Line: Local and Global Ecosystem Markets

Carbon markets are off to the races around the globe, and wetland mitigation banking has shown it can deliver value in local cases. How do we take lessons from both worlds? How do we balance commoditizing ecosystem services with the reality that local people care deeply about these natural resources they depend on? For ecosystem service markets to move beyond a cheaper way to deliver regulatory compliance and drive us toward sustainability, they must become an integrated part of a larger ecosystem services arena. Bobby Cochran of Oregon’s Clean Water Services examines this issue through the lens of wetland mitigation banks.

22 February 2008 | It’s been nearly a decade since Clean Water Services (based in Oregon’s Tualatin River Basin) jumped into the world of wetland banking. In that time, partners in the Tualatin also launched a water quality trading program. In Oregon, we’ve watched the wetland mitigation banking sector grow into an important industry and part of a growing family of ecosystem services markets.

With some bumps along the way, this growth is showing some positive trends. Bankers from diverse backgrounds (farmers, restoration consultants, and private firms) working in the marketplace have created a constituency demanding predictable rules and a defined, tradable wetland product. As markets for wetlands, carbon, and water grow, their products can become more truly tradable. But the goal of truly tradable must co-exist with truly sustainable for these gains to carry their value into the future. Several barriers remain to melding these two goals.

Dealing with Differences in Quality

In an ideal ecosystem services market, information would be available for anyone to order up quantified ecological benefits by habitat type in the way many of us order peppers and mushrooms on pizza.

Ecosystem services markets, however, will never be so neat, because they deal with complex systems of land, water, air, biodiversity, and that wildcard – people. In Oregon, many wetland banks are of high quality, lining up nicely in the places mapped as having the highest conservation/ecosystem services value.

Astute wetland bank sponsors deserve much of the credit for this, but new investment capital is increasing capacity to engage in strategic site location rather than grabbing opportunities. In Oregon, and many other places, we see a broader movement afoot to pay closer attention to quality and sustainability in mitigation banking.

This is important because not all wetlands are created equal. A wetland filled with cattails and surrounded by development will not provide the kind of biodiversity or water quality benefits provided by a mix of emergent and wet prairie wetland surrounded by an upland mosaic of oak habitat.

Many Army Corps of Engineers Districts have used mitigation ratios to deal with the quality issue. For example, impacts on vernal pools require higher mitigation ratios than impacts on scrub shrub wetland. More recently, some Corps districts have added functions-based accounting, which moves beyond treating a wetland acre as any other wetland acre and tries to account for the larger suite of wetland functions. These efforts are laudable, but more could be done.

In ecosystem services markets, we pay an inordinate amount of attention to the science beyond defining the number of credits generated by a restoration action. There are other places in the market to insert incentives for quality. Imagine a quality rating attached to a credit like the US Green Building Council (USGBC)’s Leadership in Energy and Environment Design (LEED) Certification program. Criteria for quality might include the site’s location in a mapped priority conservation area, the level of permanent protection given to the site, or the time remaining before my bank reaches all performance standards. With a gold rating in hand, I could increase the income potential of my bank by:

• Getting a premium price on my credits from that developer who wants wetland with species benefits;
• Reducing the amount of financial assurances required by the Corps and other agencies to back my credits; and
• Accessing a streamlined instrument approval and credit release process.

Efficiency, Transparency, and Local Control

Continued growth in the wetland mitigation banking industry and new federal rules, which provide greater incentives for banking, are likely to increase demand for standardized marketplace exchange processes, reporting requirements, and other market infrastructure.

In terms of exchange, bankers who work in multiple states or in multiple markets will not want to deal with multiple regulatory frameworks. Bankers in regions with many overlapping wetland bank service areas will want tools to get price information to ensure that bankers and buyers are getting the best deal.

Without marketplace exchange tools, registries, and standard processes, transaction costs remain high, and from the ecosystem’s perspective, it would rather have that money going directly into restoration. Tools like the Regional Internet Bank Information Tracking System (RIBITS) platform for registering credits and the Ecosystem Marketplace are helping by providing information, a critical element of efficiency and transparency.

In the quest for efficiency and market volume, we should not forget that local people who use and know wetland and wildlife services should remain in control of credit standards. Local in this context may be a state, a region, or a watershed.

This does not mean every region should invent its own infrastructure for setting prices or verifying bank performance. In fact, the opposite is true: as the banking industry grows, more and more regions should search for common procedures to create a standardized, tradable product.

This does not mean that a wetland restored in Oregon should be sold to offset an impact to a wetland in Nebraska or Thailand, but there are essential elements of all ecosystem markets that can and should be shared.

A common market infrastructure will make it possible for participants in mitigation banking to specialize and distribute their experience more easily across regions. In most states, institutional review teams of agencies verify credits, gather market information, assess market demand, and monitor compliance. This is an enormous amount of work. As markets grow, new entities can assume these tasks, leaving review teams to adjust program goals, verify standards have been followed, and monitor market performance.

Moving from Sites to Systems

Mitigation banking is a program tied to acquiring, restoring, and managing sites. The day-to-day business of running the mitigation banking market can easily distract banking stakeholders from looking toward new challenges facing ecosystems.

Current banking practices lock wetland and species functions into specific parcels, leaving them exposed to changes caused by climate change or urban growth. Important parts of wetland banking (e.g. trading ratios, endowments, and other risk management measures) are tied to sustaining the functions of a site at a snapshot in time. A lot of investment goes into wetland banks, investment that can benefit forests, wildlife, and riparian corridors. Looking at wetland banking in isolation misses the role wetland banks can play in restoring other ecosystem services. Wetland banking is part of a system of conservation investments that include grants, incentives, regulations, and other markets.

Within banking, some changes can be made to move from sites to systems. Instead of making sure each site succeeds, mitigation bank review teams can incorporate measures to make sue the whole program succeeds. Borrowing from the Great Miami water quality trading program in Ohio, a portion of credit transactions can be invested in an “insurance pool” of credits.

Alternatively, whole wetland banks can be sited to protect against risks of future habitat change, and credits can be withdrawn or purchased to cover projects lost to floods, invasive plants, or events not accounted for in current risk protection measures. Whatever the answer, ecosystems need the flexibility to move and still provide key services.

The Importance of Interconnectivity

In conservation biology, interconnectivity often evokes a picture of green corridors connecting large patches of habitat. Markets need to keep this picture in mind as they develop.

Wetland banking alone is not going to get us where we need to go with regard to ecosystem restoration, and banking needs to continually connect with other conservation tools if it is to be effective.

For example, the current “no net loss” national policy does not help make up for the decades of wetland loss before this policy took hold, and it does not protect the upland areas necessary to support watersheds and ecosystem services. The same is true in other ecosystem markets.

It is in linking wetland mitigation, water quality trading, carbon, and other ecosystem services markets that we begin to leverage the kinds of investments needed to recover entire ecosystems. The recent agreements between the Department of Agriculture, Environmental Protection Agency, and the Fish and Wildlife Service, coupled with proposed elements in the next Farm Bill, provide an important opportunity to link market tools with other conservation approaches and tools.

Regional efforts are also taking on the challenge of linking markets. In Oregon, the Willamette Partnership is moving from a water-quality trading program to an integrated marketplace for ecosystem services.

Together, ecosystem market leaders have begun organizing around the concept of an Ecosystem Services Council to promote transparency, integrity, and quality for ecosystem markets beyond Oregon in the same way the U.S. Green Building Council has successfully advanced sustainable building practices through its certification program. Regional efforts like the Ecosystem Services Council need to connect with networks in the Chesapeake, Mississippi, Great Lakes, and other regions to develop common infrastructure and standards.

As banking and other markets move into the next decade, greater attention to quality, more efficient transaction processes, and greater recognition and treatment of wetlands as “system elements” will make sure wetland banking continues to be a tool moving beyond regulatory compliance to real ecosystem gains.

Bobby Cochran is the Environmental Marketplace Analyst for Clean Water Services, a public wastewater and stormwater utility dedicated to the health of Oregon’s Tualatin River Basin since 1970. He can be reached at [email protected].

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